Presented by Dialpad
2019 was kind of a messy year for tech IPOs. It started well, but then it felt like everybody was rushing to “get out” before the economy went south or the window closed. We saw the rise and fall of big name brands, questioned business models that once made sense, and embraced a drive to more rational business models. I, for one, think this was actually a good thing.
It was good because although 2019 was a year full of challenges, it was also a year of lessons to be learned. For the past couple of years, highly valued startups have been a bit like Icarus, flying too close to the sun and full of hubris and non-stop self-promotion about how they’ve been “crushing it.” Now, reality is setting in. With many companies previously chasing that mythical “unicorn” status, will 2020 be the year we answer the question: Are unicorns extinct?
The term “unicorns” was introduced to our lexicon nearly a decade ago. In 2013, companies were starting to see rapid growth and inflated valuations. A Harvard Business Review study found that companies were growing twice as fast from 2012-2015 as companies founded just a decade before. The term “unicorn” was coined by entrepreneur and investor Aileen Lee to describe something that was incredibly hard to attain, to a mythical degree.
Now, there are 450 companies in the Unicorn Club, and after some of the failures of 2019, many are wondering if any in this club will reach the peak and an IPO. But the real question is no longer will they go public, it’s should they.
In the past six months, we have seen course corrections to help answer this very question. Investors, executives, and employees are starting to see the cracks in the armor of the unsustainable “grow at all costs” mantra and are looking to more responsibly manage their businesses. Now, more sustainable business practices aren’t the exception, they are becoming the norm. Growth companies are now being held to a higher standard of performance.
Startups are cutting back expenses, focusing on what is working as opposed to throwing unlimited cash at billboards, radio, events and, dare I say, even hiring employees in lower cost locations outside of Silicon Valley (San Francisco included). When there is too much burn and unrealistic growth expectations, weird things happen. Getting to a sustainable, repeatable, and logical cycle of growth and cost is what the best performing companies do.
Lean startups encourage smarter, not harder, work. Teams and processes are streamlined, with leaders doing the “right thing” for their company, its products and customers, and employees. Hypergrowth is now more than just an aspiration, it can also be a liability. Therefore, companies that take the time to innovate and adjust are more likely to find success. As Ross Geller famously said, “PIVOT… PIVOT.”
It has been noted that 9 out of 10 startups fail, and investors are taking note and making those pivots. We’ve seen pulled IPOs, a movement towards more direct listings and, let’s be honest, full-on failures. The gold standard used to be a high valuation, but nowadays valuations are often seen as overinflated nonsense.
Executives are rethinking strategy and focusing instead on the clear path towards profitability. Revenue growth matters, and we are now tracking members of the $100M ARR Club. It can be assumed that most companies hitting this high mark are on a clear path to going public, but many are now exercising restraint and waiting for the right time. For example, Asana announced last February that it achieved $100M ARR, and it took a full year before filing for a direct listing.
This is a hot topic among the investment community as well. At last year’s Web Summit tech conference in Lisbon, a number of the panel discussions focused around the debate between valuation and profitability, with many investors taking the side of long-term sustainability.
As we enter into this new phase of responsible growth, many businesses may struggle to adjust. Companies that use their revenue and funding to prop up unsustainable business practices rather than investing in future growth will find themselves at a disadvantage and will eventually be faced with difficult choices. On the flip side, companies that choose to grow at the right cost will instead be built to last and thrive for years to come.
For both businesses and investors, it will require an intentional refocus away from the status quo and a demand for a higher standard of business practice. And for many, the time to choose is now. Are you ready to change, or will your business go extinct?
Craig Walker is CEO of Dialpad. Follow him on Twitter @cwalker123 .
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